- James I. Clark III
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Despite a Sluggish Economy, American Household Wealth Is On the Rise
American households’ net worth moved up a bit as the year began, with rising stock prices, increased savings and debt reductions outpacing an ongoing decline in real-estate prices. According to the Federal Reserve, average household wealth in stocks, bonds, homes and other assets — minus mortgages and other debts — rose 1.2 percent to $58.1 trillion during the 1st quarter. The increase is likely to boost the economy, because as peoples’ net worth increases, they tend to become more confident about their financial future and more willing to spend. Noting the recent decline in stock prices, “in general, financial wealth has been increasing, which would tend to increase consumer spending,” said Goldman Sachs economist Andrew Tilton.
Even though Americans’ net worth rose to its highest level since the middle of 2008, it remained significantly below the peak of $65.8 trillion in June 2007. Additionally, the upsurge has been driven primarily by stock prices, which benefit people who have invested their money. The significantly larger percentage of Americans who have the majority of their wealth in their homes is still feeling the continuing real-estate slump.
Paul Ashworth, who owns Ashworth Drugs, a pharmacy in Cary, NC, says his retirement portfolio has recovered somewhat in recent years, but still is more than 20 percent less than its level when the recession began. The Ashworth family has curtailed dining out and scrapped its subscriptions to the ballet and symphony. “The bounce hasn’t really made me feel better at all,” Ashworth said. “I still have a job, but I don’t feel as secure. We don’t feel as good about getting out and spending as we used to.”
The Fed’s quarterly overview of American household, business, bank and government finances showed that companies are accumulating profits rather than spending them. Cash holdings and other liquid assets rose 2.6 percent to $1.91 trillion. At 6.8 percent of total assets, the level of cash reached its highest level in nearly 50 years. Debt levels in budget-crunched state and local governments showed slight declines, but that was outpaced by an increase in federal debt. Government debt rose two percent to $12.1 trillion during the 1st quarter.
Meanwhile, the value of real-estate assets continued their decline, falling 1.9 percent to $18.1 trillion. The ongoing decline in housing is hurting consumer spending. During the housing boom of the last 10 years, many homeowners extracted wealth from their houses through mortgage refinancing and home-equity loans, which spurred spending. Now, with many homeowners owing more on their mortgages than their properties are worth, that is no longer occurring. Instead, many consumers are skeptical about the recovery’s strength and are still not spending on home improvements.
Writing on the Reason.com blog, Tim Cavanaugh says that “You know what you almost never hear about anymore? How the American consumer will lead the way to an economic recovery. Just a year ago learned pundits were holding out hope for another consumer-led recovery. The New York Times was still clinging to the consumerist wreckage as recently as May. In December, the remarkably durable idea that U.S. consumers will restore prosperity was still generating such brilliantly tautological news as ‘Consumers give boost to holiday sales.’ But the mirage of the consumer-led recovery has been fading for years. Retail sales rose 0.6 percent in the month of December, an increase that fell well below expectations of 0.8-0.9 percent, and a letdown after a Festivus season filled with tales of confident, resurgent shoppers.”
The 1st quarter of 2011 is not the only time during the Great Recession when household wealth grew. John Ryding, chief economist at RDQ Economics, notes that household net worth grew by $5 trillion between the 1st and 3rd quarters of 2009, after declining sharply earlier in the recession. Additional spending generated by the rebound helped keep the savings rate from climbing to seven or eight percent. Household savings encourage long-term economic vitality, but a rapid upward adjustment makes consumer-spending growth more difficult to achieve in the near term — a phenomenon known as the “paradox of thrift.” If the savings rate remains relatively static or rises slowly, it would remove one of the headwinds to consumer-spending growth in the near future. That would be a bullish sign for the economy, because consumer spending accounts for roughly 70 percent of GDP.